Abenomics and the Yen

by George Hatjoullis

Dollar Yen MonthlyOn December 11, 2013 I published a blog entitled ‘Abeconomics: Dollar Yen to 124…?‘. It was a technical piece that suggested “There seems to be a well defined continuation pattern, the measured move ending at 124 or thereabouts”. Timing however was unclear. I also offered a more fundamental justification for why this technical pattern might be revealing itself,“The real change is in the commitment to success. Abe has basically said ‘whatever it takes’ “. The action taken by the BoJ overnight suggests that ‘whatever it takes’ means something in Japan. The action has been precipitated by the difficulty in breaking the Japanese citizens deflation mindset. The consumption tax has worked against but so have the global deflation pressures that everywhere evident. From my first blog on the subject, Abeconomics, Deflation and the Japan Conundrum, published March 27,2013, I have maintained that Japan may not succeed in breaking the deflation mindset without monetizing the government’s debt. This is increasingly looking to be the case. So what now?

The problem for Japan is that deflation has become a global problem. The main culprit is the eurozone which despite promises to do ‘whatever it takes’ has not done so. Japan is trying to inflate into a deflationary global economy. The additional easing announced should be sufficient to complete the technical move of Dollar Yen to 124, but this may not be sufficient to break the domestic deflation mindset. The depreciating currency is merely exporting Japan’s deflation into a deflationary global environment. It cannot import inflation because there is none to import. The risk here is that the global economy settles into a ‘Japan-like’ deflationary mindset. The only action that can break such a mindset is monetary financing of fiscal spending but there is no inclination, or indeed mechanism, for effecting such a policy regime. The fact that Japan is failing is not a reflection on Japan but an indication of the condition of the rest of the world. It is a very worrying image.